Controlled Foreign Company (CFC) rules in Denmark for 2023
Controlled Foreign Companies (or CFSs) have become tightly regulated in Denmark as more corporations look to minimise their tax liability by offshoring their subsidiaries to lower-tax countries. As corporations increasingly do business across multiple continents, the drive to avoid higher taxes in their home countries has necessitated new laws and regulations. This article will discuss what is considered a CFC and the regulations and directives specific to Denmark for the tax year of 2023.
Controlled Foreign Income (CFC) rules in Denmark for 2023
Controlled Foreign Companies (or CFSs) have become tightly regulated in Denmark as more corporations look to minimise their tax liability by offshoring their subsidiaries to lower-tax countries.
As corporations increasingly do business across multiple continents, the drive to avoid higher taxes in their home countries has necessitated new laws and regulations.
This blog will discuss what is considered a Controlled Foreign Company (CFC) and the regulations and directives specific to Denmark for the tax year of 2023.
In A Hurry?
CFC is short for Controlled Foreign Companies.
At times, it can also be referred to as Controlled Financial Companies.
CFC rules exist for corporations seeking to avoid higher taxes in their home countries.
Controlled Foreign Company (CFC) rules vary from country to country and have become more strict in recent years to prevent tax evasion.
What is CFC?
Controlled Foreign Companies, commonly called CFCs, relate to income tax rules designed to limit tax artificial deferral using offshore entities.
Some countries offer lower corporate income tax rates than Denmark.
CFC rules in Denmark are meant to tax income allocated to a controlled company in a low-tax country, which is not currently taxed to its owners in Denmark.
Read about Transfer Pricing rules in Denmark for 2023
Why did Denmark implement CFC rules?
In 2019, the EU Commission sent a reasoned opinion to Denmark for failing to communicate with the Commission rules that implement CFC rules required by the EU anti-tax avoidance directive.
The Commission stated that these new CFC rules should deter profit shifting to low or no-tax countries.
As a result, in 2021, the Danish government later agreed on a new law (L 89) regarding CFC taxation.
These rules have been in effect since July 1, 2021.
How Are Controlled Foreign Companies (CFCs) Taxed in Denmark?
Denmark-based companies are generally not taxed on profit from their subsidiaries outside Denmark unless the subsidiary is considered a Controlled Foreign Company with CFC income.
Based on current Danish CFC rules, a Denmark-based company has to include in its taxable income in Denmark either the total taxable income of a CFC subsidiary or only the CFC income of the subsidiary if it qualifies as a CFC.
If the following requirements are met, then according to Danish tax laws, it falls under Danish CFC tax rules:
1: The Danish company and other group member companies directly or indirectly own more than 50% of the capital or control more than 50% of the voting rights.
2: If more than 1/3 of the subsidiary’s income, assessed under Danish tax laws, consist of predefined CFC income types, such as interest, royalty, capital gains, etc. (see a complete list later in this blog).
What countries are considered low-tax countries in relation to CFC?
Something crucial to consider is that there is no black-or-white list of countries that exempt subsidiaries based in certain countries from CFC taxation in Denmark.
What types of income are considered CFC-income?
Types of CFC income are:
Capital gains and losses
Profit from selling intangible assets
Income from financial leasing
Income from insurance and banking
Income from CO2 quotas and CO2 credits
Income from companies which only invoice clients and receive invoices from suppliers (and provide no other value)
Income from intangible assets (except for goodwill)
The CFC rules for Danish companies are complex and multi-layered.
If you think you may fall under Danish CFC rules, it is best to consult a knowledgeable tax consultant.
Any controlled foreign subsidiaries of Danish companies are exempt from CFC taxation in Denmark if less than 1/3 of their income is CFC income.
Read more about Controlled Foreign Companies and CFC rules in Denmark on the website of the Danish Tax Agency
(This blog was updated on: 4.3.2023)